Indices Insider: Are markets only taking a breather?

US indices have had one of their worst weeks of the year so far as stock markets have stumbled from multi-year highs as risk aversion has gripped markets. This isn't just evident in the stock markets, US Treasury yields have also backed away from recent highs and risky FX including the euro is also coming under pressure.

The trigger for sentiment draining from the markets has been growth concerns in Europe and China and fears that the sovereign debt crisis could come back to haunt the markets. Growth prospects in the US may be good right now, but that doesn't mean that the SPX 500, the Dow and other indices are going to be able to avoid a sharper sell-off. Big US corporations derive their profits globally, so weakness in key markets in China and Europe could hurt US markets.

But does this mean the up-trend in stocks is coming to an end? Not necessarily. Stocks in the US could also come under pressure, but they may still outperform European markets. Likewise, we have noted that smaller Asian economies have started to pick up in recent months, thus China could follow with a lag and growth in the Asian powerhouse could bottom in the coming weeks and months. This may be one reason why Asian markets have been fairly resilient in the last couple of days even in the face of sharp sell-offs for US and European stocks.

So what are the lead indicators of stocks telling us? Interestingly, the Nasdaq, the internet and technology index in the US, which tends to lead the more established indices, has actually started to rise again after a sharp sell off on Wednesday. There has been some good news for the technology sector after Apple announced a dividend and a share buyback, however it tends to lead markets up and down and if it can continue to recover into Friday then it is worth watching out for. As you can see in the chart below, the NAS100 was starting to look overbought according to the RSI, thus a slight pullback was to be expected.

The NAS100: daily chart

Source: Forex.com

So what do the technical indicators tell us about the other indices?

SPX 500:

This index pulled away sharply after surging to a 4-year high earlier this week. Interestingly, volume has been fairly light this week, which tells me that the recent down move is actually due to profit taking and investors may come back in to buy on dips, thus there may be another leg higher for the SPX 500.

On a 4-hourly chart the SPX 500 is starting to look oversold and support lies at 1,380 where bids may start to develop leading to another push to the 1,400 mark. Below 1,380 we may see a push lower to 1,350 - the 50-day sma.

SPX 500: 4-hourly

Source: Forex.com

Eurostoxx 50:

This index is following the lead from the US right now and is currently testing support at 2,494 - the 50-day sma. This could be a good platform to re-test the 2,600 highs. Since the start of the year the rally in the pan-European index has lacked the same momentum and ferocity compared to the move higher in the SPX and the Dow Jones, and we expect this to continue as growth deteriorates in Europe and sovereign fears flare up once more.

We would also note that the banking sub-sector of the Eurostoxx missed the last leg higher in stock markets and has traded sideways since February. This is a massive warning sign. If this index breaks below 150 - its 50-day sma , then further support lies at 140 - the bottom of its recent range. Below this level and the entire ESTX 50 could be at risk of a deeper decline.

Right now we are in wait and see mode, if ESTX50 falls below 2,450 it could signal deeper losses towards 2,400 - a cluster of daily smas. Although US stocks may have further to fall, if we see a more protracted decline in the ESTX 50 then it could be tougher for the European index to bounce back compared to US stocks, which we believe are a buy on dips.

ESTX 50: Daily

Source: Forex.com

Hang Seng:

Along with other Asian indices, the Hang Seng has lagged behind US stocks this year and traded in a fairly tight range over the last month. It is currently testing its 50-day sma at 20,757. This is a key support level, if we fall below here then we could see another decline to 20,100 and then to 20,000 - a key psychological level.

As we have said before, it's always hard to pick the top in a rally - and we aren't ready to say that stocks are heading south in the short-term. Indeed, although the RSI is pointing lower, it remains within its recent range and is moving in line with price action. Indeed, on a shorter term chart the HK40 seems to have made a temporary bottom around the 50-day sma, and the RSI has started to show signs of picking up as you can see in the chart below.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that FOREX.com is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. FOREX.com is regulated by the Commodity Futures Trading Commission (CFTC) in the US, by the Financial Services Authority (FSA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia, and the Financial Services Agency (FSA) in Japan.